Value Growth Q

A recession is expected in an economy within the next year. Portfolio Manager A has shifted more of their stocks from the financial industry to the health care industry. Portfolio Manager B has shifted more of their stocks from the technology industry to the utility industry. Which of the following statements is most accurate regarding the performance of each manager?

A) Portfolio Manager A is expected to underperform the broad market while Portfolio Manager B is expected to outperform the broad market. B) Portfolio Manager A is expected to outperform the broad market and Portfolio Manager B is expected to outperform the broad market. C) Portfolio Manager A is expected to outperform the broad market while Portfolio Manager B is expected to underperform the broad market.

B

Growth does better in recessions

Hint: Manager A is shifting from Value to Growth; while Manager B is shifting from Growth to Value.

L3Crucifier, thank you post the good questions. Appreciate it if you can post the explanations along with the answers for all your questions.

Correct ans is B, don’t know how! I don’t have the question id to search back in Qbank

B is clearly wrong. In recession Growth stocks outperform since few growth stories are available & may be trading at a premium.

B) Portfolio Manager A is expected to outperform the broad market and Portfolio Manager B is expected to outperform the broad market.

You only hinted : Manager A is shifting from Value to Growth (outperform); while Manager B is shifting from Growth to Value (underperform)

Answer is B) because stocks in Health care and utility industries are non cyclical and defensive in nature. Hence, these will outperform in recession.

Text is ver clear cut on:

Value stock - Utilities, Financials

Growth stock - Health care, Technology

Now i found the que in Qbank; answer is C there as well

Both managers are exhibiting style drift. Manager A’s drift is actually beneficial to performance while B’s is not. Value managers tend to have greater representation in the utility and financial industries whereas growth managers tend to have higher weights in the technology and health care industries. Growth stocks are more likely to outperform during a recession as there are few other firms with growth prospects and a premium would be placed on growth stocks’ valuation.

L3crucifier: Qbank also has answer as C, where did u get answer as B?

Rahul - Qbank usually shuffles the answer choices, see this.

A recession is expected in an economy within the next year. Portfolio Manager A has shifted more of their stocks from the financial industry to the health care industry. Portfolio Manager B has shifted more of their stocks from the technology industry to the utility industry. Which of the following statements is most accurate regarding the performance of each manager?

A) Portfolio Manager A is expected to underperform the broad market while Portfolio Manager B is expected to outperform the broad market. B) Portfolio Manager A is expected to outperform the broad market and Portfolio Manager B is expected to outperform the broad market. C) Portfolio Manager A is expected to outperform the broad market while Portfolio Manager B is expected to underperform the broad market.

Your answer: C was incorrect. The correct answer was B) Portfolio Manager A is expected to outperform the broad market and Portfolio Manager B is expected to outperform the broad market.

Both managers are exhibiting style drift with both being beneficial to performance. Value managers tend to have greater representation in the non-cyclical utility and cyclical financial industries whereas growth managers tend to have higher weights in the cyclical technology and non-cyclical health care industries. Growth stocks are more likely to outperform during a recession as there are few other firms with growth prospects and a premium would be placed on growth stocks’ valuation. Since the financial and technology industries are cyclical they will tend to under-perform during a recession whereas the healthcare and utility industries are non-cyclical and should outperform during a recession compared to cyclical stocks.

I don’t like this question either, but I go with it.

if you take a look at the last two recession in the US what sectors do you remember doing worse, was it financials/utilities or technology/pharmaceuticals? for me I’d say tech stands out easily for the 2001 recession, but financials stand out in 2007. So to me it seems it just depends on where the recession is stemming from.

Also I have in the past associated growth stocks as cyclical, but after answering this question I realize that my thinking may not be have been correct and the connection between growth and cyclicality may not be as strong as I originally thought.Value stocks can certainly be subjuct to cyclical effects if the reason for their value classification is as a contrarian play. In this case there is reason for their low P/E or low P/B, but the manager believes he sees something the market doesn’t. If an unexpected recession occurs, that value stock may not be able to complete its current objectives as the manager had thought and cause it underperform by quite a bit. This is just one case where a value stock would underperform.

I think the answer here is thinking in terms of all prices being efficient. If a has low P/E, low P/B (underpriced for a level of earnings due to other company factors) in a normal portion of the market cycle and it is accurately priced (due to those “other” factors), then it would perform even worse in a recession.